Forex: Dollar Down As Shutdown Impacts Rise

The mighty dollar is taking it on the chin and it's crystal clear why — a short-term fiscal solution to end the U.S. debt-ceiling stalemate is not the correct answer.

For all the celebratory statements made by politicians after Capitol Hill got its act together, the 16 days of irresponsible politicking merely served to dent investor and business confidence.

Many are left to wonder about the growth prospects for the world’s largest economy in the fourth quarter and beyond. The shaved gross domestic product estimates has the foreign exchange (forex) market thinking the Federal Reserve will refrain from withdrawing its monetary stimulus at least until the beginning of next year. No doubt Fed chair nominee Janet Yellen is keenly aware this mess will be hers to clean up should her appointment be confirmed. As such, U.S. Treasury yields have slipped and have dragged the dollar down against most major currencies, including the yen.

Dollar Slides Despite U.S. Fiscal Deal Dean Popplewell Dean Popplewell Contributor

Those owning U.S. debt maturing in 2013 can breathe a tad easier. They are no longer worried about getting repaid. Yields on U.S. short-term debt product (T-Bills) have completely erased the past two weeks’ rise. But all the entire forex market is technically doing is transferring risk to a different date. The U.S. funding deal now puts another set of T-Bills at risk — those maturing in early 2014. Overseas investors in particular will be wary about owning any U.S. product in the first half of 2014. The lack of global confidence in Washington to do its job is being priced in for that period. If the American government fails to get a bigger deal done now that capital markets have bought into this short-term extension, the next fall out could be even more aggressive.

Uncertainty Reigns

There is now a new set of dates that investors are required to have penciled in their calendars. December 13, the deadline for the House and Senate to reach a long-term budget agreement; January 15, when temporary government funding is expected to run out and finally February 7, the date until which the debt-ceiling imbroglio has been suspended. Between now and February, and with a holiday season peppered in between, investors will once again remain extremely vigilant due to the “ambiguous” policy environment. This in itself will have many second guessing their investment decisions which could lead to a limited position taking environment, where fundamentals take a back seat, and volatility is driven by “weak” position taking.

By day’s end, all that has occurred is that U.S. Congress gets a “second bite of the cherry,” and it will again be holding American creditworthiness hostage until the next debt-ceiling deadline. All the 16-day gong show has served to do is send a reminder to America’s largest creditors – China and Japan – that what ails has not been remedied, and not only in terms of the U.S. Treasury holdings, but also in terms of economic growth. There probably was no genuine fear of a U.S. default, but Washington’s actions have damaged its overseas reputation, even more so that global economic growth is so tenuous. Japan was put on alert and is prepared to flood its financial markets with cash. China is expected to take a different approach – do not be surprised if Beijing pushes harder for global acceptance of its currency as an alternative to the once “mighty” dollar in international trade. There was subtle mention of that only last week, but the noise will become louder.

Chinese Economy Gets a Boost

Whereas America has rattled investor confidence, Chinese data is providing encouragement. Its economy grew +7.8%, year-over-year, in the third quarter of 2013, in line with the median forecast and accelerating from +7.5% in the second quarter. Even September’s industrial production was healthy, rising +10.2%, year-over-year, in line with market expectations. The disappointments came with retail sales and fixed-asset investments, both a touch weaker. The street now expects consecutive quarter growth to soften somewhat following the strong summer activity. The Chinese government is likely to continue providing support when the annual growth rate slides toward 7%, but it will probably slow low-key stimulus if growth is near 8%. China’s Communist leaders are due to hold a key policy meeting next month and the forex market will be interested in their take on the U.S. fiscal fiasco.

Expect the forex market to tread water for the time being. With the next U.S. fiscal doomsday only a few months off, and Yellen’s nomination on tap, it should be a plus for risk but riskier assets have not lived up to expectations lately. Investors are expected to play it safe and stick to contained range trading until the data deluge rushes in. That begins next week with the release of the granddaddy of fundamental data – nonfarm payrolls.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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